Answer:
The difference in value is worth $8,269 more in money.
Explanation:
Case 1. Payments are made at the end of each year
So here, we will use the annuity formula for computing the present value of payments that we are receiving at the end of each year.
Here
Annual Cash flow is $12,100
Interest Rate "r" is 7%
And
Number of Payments "n" will be 17
Present Value = Cash flow * [1 - 1 / (1+r)^n] / r
By putting values, we have:
Present Value = $12,100 * [1 - 1 / (1 + 7%)^17] / 7%
Present Value = $12,100 * 9.763223
Present Value = $118,135
Now
Cash 2. Payments are arising at the start of each year
Just like the case above, we will use the annuity formula for computing the present value of payments that we are receiving at the start of each year. The first payment will be at worth the same because it is received in today's price.
So
Present Value = Cash flow + Cash flow * [1 - 1 / (1+r)^n] / r
So by putting values, that were used in case 1, we have:
Present Value = $12,100 + $12,100 * (1 - (1/1.07)^16) / 0.07
Present Value = $12,100 + $12,100 * 9.446649
Present Value = $126,404
Difference in Present Value = PV of Case 1 - PV of Case 2
= $126,404 - $118,135 = $8,269
The difference in value is worth $8,269 more in money.
